BOE Upgraded Forecasts on Growth and Inflation

At the quarterly Inflation Report in November, the Bank of England raised forecasts for GDP growth and inflation outlook as economy has expanded again and will not slip back into a recession. These estimates were made based on assumptions that the benchmark interest rate, currently at 0.5%, rises to market expectation of 1.1% in 3Q10 and 2.1% at 1Q11, as well as asset purchase program of 200B pound.

According to the quarterly Inflation Report, the UK's economy will undergo a 'slow recovery' and 'the outlook for inflation in the medium term is somewhat higher than the August report, reflecting the stronger projected distribution for GDP growth... the risks of inflation being above or below target are broadly balanced by the end of the forecast period'.

Although the nation's GDP surprisingly contract -0.4% qoq in 3Q09, the central bank revised up its GDP forecasts and signaled revisions of 3Q09 data. According to the BOE, upward revisions reflects the increased asset purchases, the lower interest rate path implied by market yields, the lower level of the exchange rate and a stronger outlook for world demand.

The BOE also anticipated inflation will rise sharply in the near-term and exceed the target level of 2% in 2012. According to the report, 'the risks of inflation being above or below the target are broadly balanced by the end of the forecast period. The outlook for inflation in the medium term is somewhat higher than in August, reflecting the stronger projected distribution for GDP growth'.